Understanding Basis Points In Credit Card Processing Rates

Business owners have plenty of things to worry about. And I’m sure understanding credit card processing rates isn't a top priority. But maybe it should be.

Why do we believe business owners should take a minute to understand merchant account rates? In today’s modern world, it’s nearly impossible to keep a business going if you don’t accept credit cards. Our society is moving more towards a cashless society with each passing year. People just don’t use cash that much anymore, and who carries around personal checks these days? When it comes to paying for items or services, it’s becoming a bank card world.

Whether it’s debit or credit, more often than not it’s a cashless transaction. But accepting credit cards comes with a cost. Merchants need to know they’re getting the best pricing for their business. The only way to do that is to understand a bit about merchant account rates.

Basis Points- the first step to understanding merchant account rates.

We’ve established the need for credit card processing, but how does a business proceed while getting the best pricing for merchant services? To understand this, an explanation of “basis points” is necessary. As with most things in commerce, processing rates consist of a wholesale cost plus a markup. This markup is the important part, it’s what determines your costs and whether you’re getting a fair rate. In credit card processing, the markup is expressed as “basis points”.

You see, there are several costs involved with processing credit and debit card transactions. Some are fixed, many are negotiable. Interchange fees are the base, or wholesale, costs for processing credit cards. They are set by the card brands such as Visa and MasterCard. Interchange fees are the base costs, are the same for everyone, and are non negotiable. They are expressed as a percentage rate + a per-transaction fee.

Then there is the mark-up that the merchant service provider charges for providing you access to your merchant account. This is usually expressed in “basis points” + a per-transaction fee.

Of course, there are other fees that make up the sum of your credit card processing costs. But to know how much mark up a processor is charging you, look at the basis points. When a payment processing company gives you a quote for merchant services, it’s often done in basis points or “bps” for short.

But what does that mean to you? If a processor is charging you 20 basis points, how do you know how much that’s going to cost you? Or maybe you’re comparing a quote to your current processing. How do you compare a quote for 20 basis points to your current charges, which are most likely in a percentage?

What exactly is a basis point?

Basis points are a common unit of measure used in calculating interest rates and credit card processing fees. One basis point is equal to 1/100th of one percent. We can express this as 0.01% in percent form or 0.0001 in decimal form. Remembering this will help you perform the calculations to figure out what you are being charged.

To figure out the amount you may pay in fees, convert the number of bps to a decimal or a percentage. Then you multiply this number by the dollar volume of your transactions. For example, let’s say a merchant processes $50,000 in volume and the processor charges 20 basis points.

First, convert the bps to a decimal or a percentage. 20 (bps) X 0.0001 (or 0.01%) equals 0.0020, or the percentage value of 0.20%. Now you’re ready to do the calculation. Multiply the percentage X volume to get your fee.  0.0020 (0.20%) X $50,000 results in a fee of $100.00.

You can also do a reverse calculation to find out how many basis points you’re being charged. Many statements these days will show the mark-up rate in a percentage. To find out how many basis points you’re being charged, multiply the percentage times 100.

Let’s do a calculation: The percentage rate on your statement reads 0.25%. Calculate 0.25 ✕ 100 = 25. You are paying 25 basis points. And don’t forget you will also be paying a per-transaction fee as well.

How to make sure you get a fair rate and transparent pricing.

Your business keeps you busy enough already. Do you really want to spend time doing calculations to try to validate that your fees are what they should be? The answer is probably no. 

But understanding how basis points work and how to calculate your costs will help you compare apples to apples.

Unfortunately, this information only helps you if you’re on an Interchange-Plus pricing model. This will never work if you’re on Tiered Pricing. Why? Because with this pricing model, they don’t separate the interchange fees (base costs) from the mark-up. The merchant has no way of knowing how much of the rate is the base cost and what percentage goes to the processor.

Instead, you have three separate tiers and a different rate for each tier. How much you pay depends on the card types you accept and which tier they fall into. And the processor decides which card types will go into each tier. The merchant has no control.

If you’re on Tiered Pricing, the best way to figure out if your pricing is competitive is to calculate your effective rate. You won’t ever know the true mark-up the processor is charging you. But you can take the total cost you pay to accept credit cards and calculate your effective rate as a percentage.

To easily understand merchant account rates, demand Interchange-Plus Pricing.

If you’re looking for the most transparent pricing, think about demanding Interchange-Plus pricing instead. Interchange Plus pricing is a simpler way of calculating and paying for credit card processing. This pricing model passes the base interchange rates on to the merchant, along with the processor’s specific mark-up fee (the “Plus”).

Interchange plus pricing is beneficial because you know exactly what you’re being charged for each transaction. It’s very transparent and in utilizing this model, your business is protected from hidden or unexpected fees.

How do basis points (bps) play into Interchange-Plus pricing?

Interchange-Plus pricing usually includes two components–one being the basis points, the other the authorization fee charged by the card brands. As we’ve pointed out above, the Interchange rate isn’t negotiable. It comes from companies like Visa, MasterCard, and the banks that issue credit cards to consumers. There is no avoiding or changing Interchange cost, and the rates are the same for every merchant. 

The basis point, however, is what a payment processor charges the merchant for their services. Once this rate is locked in, the pricing is set per transaction and there are no hidden surcharges or fees. This often results in substantial savings on processing fees and more money in your pocket.

Merchants should look for a Merchant Service Provider who offers competitive rates, obviously. But merchant services are about more than just your rates. This is likely to be a long-standing partnership for accepting payments in your business. Your MSP should also offer the best solutions for your business’s needs and the service level you deserve.

MonerePay is a payment processor with a team of ETA-Certified Payment Professionals who offer true Interchange-Plus pricing. We built our brand on transparency and honesty. When you receive a quote for Interchange-Plus Pricing, what you see is what you get. There are no additional fees, and this translates to a clear understanding of what exactly your credit card processing costs are.